```

[Federal Register Volume 78, Number 219 (Wednesday, November 13, 2013)]
[Rules and Regulations]
[Pages 67938-67951]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-25454]

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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 385

[Docket No. 2011-3 CRB Phonorecords II]

Adjustment of Determination of Compulsory License Rates for 
Mechanical and Digital Phonorecords

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Final rule.

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SUMMARY: The Copyright Royalty Judges are publishing final regulations 
setting

[[Page 67939]]

the rates and terms for the section 115 statutory license for the use 
of musical works in physical phonorecord deliveries, permanent digital 
downloads, ringtones, interactive streaming, limited downloads, limited 
offerings, mixed service bundles, music bundles, paid locker services, 
and purchased content locker services.

DATES: Effective: January 1, 2014.

FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or 
Gina Giuffreda, Attorney Advisor. Telephone: (202) 707-7658 or email at 
crb@loc.gov.

SUPPLEMENTARY INFORMATION:

Background

    Section 115 of the Copyright Act, title 17 of the United States 
Code, also known as the mechanical compulsory license, requires a 
copyright owner of a nondramatic musical work to grant a license to any 
person who wants to make and distribute phonorecords of that work, 
including digital phonorecord deliveries,\1\ provided that the 
copyright owner has allowed phonorecords of the work to be produced and 
distributed to the public, and that the licensee complies with the 
statute and attendant regulations. 17 U.S.C. 115(a).
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    \1\ The Digital Performance Right in Sound Recordings Act, 
Public Law 104-39, 109 Stat. 336 (1995), extended the mechanical 
license to digital phonorecord deliveries. Consequently, the license 
covers digital transmissions of phonorecords in addition to the 
physical copies such as compact discs, vinyl and cassette tapes.
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    The Copyright Act requires the Copyright Royalty Judges (Judges) to 
conduct proceedings every five years to determine the rates and terms 
for the section 115 license. 17 U.S.C. 801(b)(1) and 804(b)(4).\2\ 
Thus, the Judges, in accordance with 17 U.S.C. 804(b)(4), published a 
notice in the Federal Register commencing the current proceeding to set 
rates and terms for the section 115 license and requesting interested 
parties to submit their petitions to participate. 76 FR 590 (Jan. 5, 
2011). In response to the notice, the Judges received 24 petitions to 
participate.\3\ The Judges set the timetable for the three-month 
negotiation period, see 17 U.S.C. 803(b)(3), as well as a deadline of 
April 30, 2012, for the participants' submission of written direct 
statements. On April 11, 2012, the Judges received a Motion to Adopt 
Settlement stating that ``[a]ll participants in the Proceeding are 
parties to the Settlement or have reviewed the Settlement and do not 
object to its being adopted as the basis for setting statutory rates 
and terms.'' \4\ Motion to Adopt Settlement, at 2 (Apr. 11, 2012).
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    \2\ The Judges commenced a proceeding in 2006, as directed by 
section 804(b)(4) of the Copyright Act, and published their final 
determination in the Federal Register on January 26, 2009. 74 FR 
4510. Therefore, commencement of the next proceeding--the current 
proceeding--was to occur in January 2011. 17 U.S.C. 804(b)(4).
    \3\ A complete list of parties submitting petitions to 
participate can be found at 77 FR 29261 (May 17, 2012). The Judges 
also received one filing styled as a ``Comment in Response to 
Request for Petitions to Participate,'' which subsequently was 
withdrawn. See 77 FR at 29261 n.3.
    \4\ The Settling Parties are comprised of National Music 
Publishers' Association, Inc.; the Songwriters Guild of America; the 
Nashville Songwriters Association International; the Church Music 
Publishers Association; the Recording Industry Association of 
America; Digital Media Association; and CTIA-the Wireless 
Association. One participant's signature was omitted inadvertently 
from the motion and subsequently provided on April 18, 2012. See 77 
FR 29260 n.4. Although two participants did not sign the motion, the 
Judges presume that they each reviewed the settlement and harbored 
no objection to its adoption, per the signatories' representation. 
Id.
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    Section 801(b)(7)(A) of the Copyright Act authorizes the Judges to 
adopt rates and terms negotiated by ``some or all of the participants 
in a proceeding at any time during the proceeding'' provided they are 
submitted to the Judges for approval. This section provides in part 
that the Judges must provide to both non-participants and participants 
to the rate proceeding who ``would be bound by the terms, rates, or 
other determination set by any agreement * * * an opportunity to 
comment on the agreement.'' 17 U.S.C. 801(b)(7)(A)(i). Participants to 
the proceeding may also ``object to [the agreement's] adoption as a 
basis for statutory terms and rates.'' Id.
    The Judges ``may decline to adopt the agreement as a basis for 
statutory terms and rates for participants that are not parties to the 
agreement,'' only ``if any participant [to the proceeding] objects to 
the agreement and the [Judges] conclude, based on the record before 
them if one exists, that the agreement does not provide a reasonable 
basis for setting statutory terms or rates.'' 17 U.S.C. 
801(b)(7)(A)(ii). Accordingly, on May 17, 2012, the Judges published a 
notice requesting comment on the proposed rates and terms, with certain 
modifications, submitted to the Judges.\5\
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    \5\ The Judges questioned whether the adoption of two accounting 
provisions, found in proposed Sec.  385.12(e) and Sec.  385.22(d), 
would encroach on the Register of Copyrights' (Register) exclusive 
jurisdiction to promulgate regulations governing the statements of 
account to be submitted under section 115 of the Copyright Act. See 
77 FR 29259, 29260-61 (May 17, 2012). This issue is discussed infra.
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    The Judges received two comments in response to the May 17 notice--
one from the Settling Parties and the other from Gear Publishing 
Company (Gear), a non-participant. On November 20, 2012, five months 
after the deadline, the Judges received a third comment from Robert 
Clarida, also a non-participant, supporting the objections lodged by 
Gear in its June comments.\6\ The Settling Parties supported adoption 
of the settlement, suggested correction of certain non-substantive 
errors and raised certain stylistic issues with regard to the proposed 
regulatory text.\7\ Gear's objections were primarily policy-based 
concerns about the appropriate scope of the compulsory license. See, 
e.g., Comments of Gear Publishing Company, at 2 (``it is inappropriate 
to offer interactive streaming and limited download rights via 
compulsory license until there is sufficient evidence to demonstrate 
that these uses will provide long term sustainable revenue * * *.'') 
and 4 (``promotional consideration'' should not be allowed under a 
compulsory license). Mr. Clarida's comments, which were submitted at 
Gear's request, see Clarida Comments at 2, challenged the compatibility 
of the proposed rates and terms with the section 115 license. See, 
e.g., Clarida Comments at 3-4 (promotional royalty rate of zero 
proposed in Sec.  385.14 violates section 115 of the Copyright Act).
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    \6\ On March 12, 2013, the Judges received a letter from the 
Settling Parties, which in part, urged that Mr. Clarida's comments 
not be considered due to the untimeliness of the submission. The 
Settling Parties' request is noted; the Judges decide, however, to 
consider Mr. Clarida's comments to address his contention that 
certain provisions are contrary to the statute.
    \7\ The Judges have corrected the non-substantive errors and 
addressed the stylistic issues in regard to the regulatory text 
identified by the Settling Parties in Exhibit A to their comment.
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    Section 801(b)(7)(A)(ii) limits the Judges' ability to reject an 
agreement on the reasonableness of the rates and terms published for 
comment. The Judges may decline to adopt an agreement as a basis for 
statutory terms and rates for participants that are not parties to the 
agreement if a participant that would be bound by the agreement objects 
and the Judges conclude that the agreement does not provide a 
reasonable basis for setting statutory terms or rates. Id. Neither Gear 
nor Mr. Clarida qualifies as a participant to this proceeding, as 
neither submitted a petition to participate. Therefore, the Judges 
cannot consider any objections lodged by them, as non-participants, 
regarding the reasonableness of the rates and terms. See Determination 
of Reasonable Rates and Terms for Noncommercial Broadcasting, Final 
rule, Docket No. 2011-2 CRB NCEB II, 77 FR 71104, 71107 (Nov. 29, 
2012); see also, Review of Copyright Royalty Judges Determination, 
Notice; correction,

[[Page 67940]]

Docket No. 2009-1, 74 FR 4537, 4540 (Jan. 26, 2009) (Judges able to 
review reasonableness of terms and rates contained in agreement only if 
a participant to the proceeding objects to the agreement).
    The Judges may, however, ``declin[e] to adopt other portions of an 
agreement that would be contrary to the provisions of the applicable 
license(s) or otherwise contrary to statutory law.'' 74 FR at 4540. Mr. 
Clarida's comments assert that certain of the proposed rules violate 
the section 115 statutory license. His assertions will be addressed 
below.

Referral of Material Questions to the Register of Copyrights

    Section 802(f)(1)(A)(ii) of the Copyright Act, in pertinent part, 
authorizes one or more of the Judges to request from the Register ``an 
interpretation of any material questions of substantive law that relate 
to the construction of provisions of this title and arise in the course 
of the proceeding.'' Any request for a written interpretation must be 
in writing and on the record, and participants to the proceeding must 
be given an opportunity to comment on the question(s) referred. Id.
    On March 27, 2013, the Chief Copyright Royalty Judge issued an 
order referring material questions of law to the Register concerning 
the Judges' authority to adopt certain terms in the Settling Parties' 
Proposed Settlement relating to statements of account. See Order 
Referring Material Questions of Law and Setting Briefing Schedule, 
Docket No. 2011-3 CRB Phonorecords II (Mar. 27, 2013). The proposed 
terms involved the accounting provisions proposed in 37 CFR 385.12(e) 
and 385.22(d) and the confidentiality provisions proposed in 37 CFR 
385.12(f) and 385.22(e).\8\ Id. at 3. The Register delivered her 
decision to the Judges on May 1, 2013, and published it in the Federal 
Register on May 16, 2013. 78 FR 28770.
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    \8\ The Order directed participants to submit an initial brief 
no later than April 5, 2013, and to submit reply briefs no later 
than April 12, 2013. The lone brief, submitted by the Settling 
Parties, was transmitted to the Register on April 17, 2013.
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Proposed Accounting Provisions

    The Register found that the accounting provisions proposed in 
Sec. Sec.  385.12(e) and 385.22(d) \9\ ``represent an encroachment on 
the Register's [exclusive] authority'' regarding statements of account 
even though the proposed provisions are consistent with the Register's 
current regulations. Id. at 28772. In light of the Register's 
interpretation, the Judges cannot adopt proposed Sec. Sec.  385.12(e) 
and 385.22(d). Nevertheless, the Judges recognize the parties' efforts 
to reach an agreement and the importance of these provisions to the 
agreement. See Letter from Settling Parties to Copyright Royalty Judges 
(June 7, 2013) (on file with the Copyright Royalty Board) (proposed 
provisions ``reflect an industry-wide consensus on necessary detail 
requirements as part of the accounting process for the proposed 
percentage rates'' and represent an ``important factor in reaching a 
settlement'' in this proceeding). Therefore, the Judges recommend that 
the Register include these provisions in the amendments to the 
regulations regarding statements of account currently being considered 
in the Copyright Office's ongoing rulemaking. See Division of Authority 
Between the Copyright Royalty Judges and the Register of Copyrights 
under the Section 115 Statutory License, Docket No. RF 2008-1, 73 FR 
48396, 48398 (Aug. 19, 2008) (the Judges may recommend that the 
Register ``amend the regulations governing statements of account to 
include additional information.'').
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    \9\ Proposed Sec.  385.12(e) would have required the licensee's 
statement of account to ``set forth each step of its calculations 
with sufficient information to allow the copyright owner to assess 
the accuracy and manner in which the licensee determined the payable 
royalty pool and per-play allocations (including information 
sufficient to demonstrate whether and how a minimum royalty or 
subscriber-based royalty floor pursuant to Sec.  385.13 does or does 
not apply) and, for each offering reported, also indicate the type 
of licensed activity involved and the number of plays of each 
musical work (including an indication of any overtime adjustment 
applied) that is the basis of the per-work royalty allocation being 
paid.'' 77 FR at 29267 (May 17, 2012). The language of proposed 
Sec.  385.22(d) mirrors that in Sec.  385.12(e), except for non-
substantive conforming language needed for its inclusion in proposed 
Subpart C.
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Proposed Confidentiality Provisions

    Conversely, the Register found that the confidentiality provisions 
proposed at Sec. Sec.  385.12(f) and 385.22(e) \10\ do not ``encroach 
upon the Register's authority with respect to statements of account'' 
nor do they ``conflict with any other authority reserved for the 
Register.'' 78 FR at 28773. The Register questioned, however, whether 
the Judges ``have any independent authority to issue regulations such 
as the proposed confidentiality [provisions] which would impose 
obligations on a copyright owner with regard to what he or she is able 
to do with a statement of account received by a licensee.'' Id. 
Consequently, the Register highlighted another potential novel question 
of law: the question of the Judges' authority regarding ``imposing 
requirements on what a copyright owner (as opposed to a licensee) may 
do (or not do) with information provided in a statement of account 
after that statement was prepared and served in accordance with the 
[Copyright] Office's regulations.'' Id. (emphasis in original).
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    \10\ The confidentiality provisions proposed in Sec. Sec.  
385.12(f) and 385.22(e) would mandate: ``A licensee's statements of 
account, including any and all information provided by a licensee 
with respect to the computation of a subminimum, shall be maintained 
in confidence by any copyright owner, authorized representative or 
agent that receives it, and shall solely be used by the copyright 
owner, authorized representative or agent for purposes of reviewing 
the amounts paid by the licensee and verifying the accuracy of any 
such payments, and only those employees of the copyright owner, 
authorized representative or agent who need to have access to such 
information for such purposes will be given access to such 
information; provided that in no event shall access be granted to 
any individual who, on behalf of a record company, is directly 
involved in negotiating or approving royalty rates in transactions 
authorizing third party services to undertake licensed activity with 
respect to sound recordings. A licensee's statements of account, 
including any and all information provided by a licensee with 
respect to the computation of a subminimum, shall not be used for 
any other purpose, and shall not be disclosed to or used by or for 
any record company affiliate or any third party, including any 
third-party record company.'' 77 FR at 29262, 29267-68.
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Referral of Novel Question to the Register of Copyrights

    Accordingly, on May 17, 2013, the Judges referred to the Register 
the novel question of ``whether the [Judges] have the authority to 
impose a confidentiality requirement such as that proposed in 
Sec. Sec.  385.12(f) and 385.22(e).'' See Order Referring Novel 
Question of Law and Setting Briefing Schedule, Docket No. 2011-3 CRB 
Phonorecords II, at 4.\11\ The Register delivered her decision to the 
Judges on July 25, 2013, and published it in the Federal Register on 
August 5, 2013. 78 FR 47421.
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    \11\ The Order directed participants to submit an initial brief 
no later than June 7, 2013, and to submit reply briefs no later than 
June 21, 2013. The lone brief, submitted by the Settling Parties, 
was transmitted to the Register on June 25, 2013. The Settling 
Parties also submitted a letter requesting that the Judges recommend 
to the Register that the language in the accounting provisions 
proposed in Sec. Sec.  385.12(e) and 385.22(d) be incorporated into 
the Copyright Office's regulations governing statements of account. 
The Judges transmitted the letter to the Register. As discussed 
supra, the Judges have made the requested recommendation.
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    The Register concluded that the Judges are without authority to 
``adopt the provisions imposing a duty of confidentiality upon 
copyright owners, regardless of whether the provisions are included in 
a voluntarily negotiated license agreement between copyright owners and 
licensees.'' Scope of the Copyright Royalty Judges' Authority to Adopt 
Confidentiality Requirements upon Copyright Owners within a Voluntarily 
Negotiated License

[[Page 67941]]

Agreement, Final Order, Docket No. 2011-3 CRB, 78 FR at 47423. The 
Register noted that section 115(c)(3)(D) of the Copyright Act grants to 
the Judges the authority to establish ``notice and recordkeeping 
requirements under which such records of use shall be kept and made 
available by licensees'' but not to those to ``be kept and made 
available by copyright owners.'' Id. (emphasis in original). Moreover, 
she found that ``such provisions are not necessary to effectively 
implement the [section 115] statutory license or to insure the smooth 
administration of the [section 115] license.'' Id. In light of the 
Register's interpretation, the Judges cannot adopt the confidentiality 
requirements in Sec. Sec.  385.12(f) and 385.22(e) of the proposed 
settlement.
    Having addressed the Register's concerns with the proposed 
settlement, the Judges now turn to the concerns raised by Mr. Clarida.

Comments of Mr. Clarida

    When presented with a settlement agreement, the Judges' task is to 
implement the settlement to the extent possible as long as no provision 
on its face violates the statutory license at issue. See 17 U.S.C. 
801(b)(7)(A); see also H.R. Rep. No. 108-408, at 24 (2004) (purpose of 
provision to facilitate and promote settlements). With this statutory 
task in mind, the Judges consider Mr. Clarida's challenge to the legal 
validity of the promotional ``free trial'' royalty rates (proposed 
Sec. Sec.  385.14(b)(1), 385.21, and 385.24), and Subpart C activities 
(i.e., ``Limited Offerings, Mixed Service Bundles, Paid Locker 
Services, and Purchased Content Locker Services'') (proposed Sec. Sec.  
385.20-24).\12\
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    \12\ Mr. Clarida also challenges the legal validity of the 
confidentiality provisions (proposed Sec. Sec.  385.12(f), 
385.22(e)). The Register's determination that the Judges have no 
authority to impose an obligation of confidentiality on a copyright 
owner with respect to a statement of account renders Mr. Clarida's 
arguments on this point moot.
    Moreover, at the outset of his comments, Mr. Clarida makes a 
vague, passing challenge to the Proposed Rule on the basis that 
``the proposed changes, if adopted, would risk placing the United 
States in violation of Article 13 of the Agreement on Trade-Related 
Aspects of Intellectual Property Rights (TRIPS). Clarida Comments, 
at 2. Congress was clear, however, that TRIPS may not be used as a 
basis for challenging any action of a federal agency and that, to 
the extent any conflict exists between TRIPS and U.S. law, U.S. law 
governs. The Uruguay Round Agreements Act, Public Law 103-465, 
sections 102(a)(1), (c)(1)(B), 108 Stat. 4809 (1994). The Judges, 
therefore, will be guided by the provisions of the Copyright Act and 
will not consider any objections based on TRIPS.
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Mr. Clarida's Concerns Regarding Promotional and ``Free Trial'' Royalty 
Rates

    Mr. Clarida argues that the promotional royalty rate of zero in 
proposed Sec.  385.14(b)(1) violates section 115 of the Copyright Act, 
which, according to Mr. Clarida, requires that every phonorecord made 
and distributed under the license be subject to a royalty. Clarida 
Comments, at 3-4. He contends that ``[z]ero is not a royalty; it is an 
exemption,'' and only Congress possesses the authority to create 
statutory exemptions under the Copyright Act. Id. at 4. The Judges' 
adoption of a royalty rate of zero, Mr. Clarida charges, would result 
in the creation of ``a new statutory exemption in the guise of a 
regulation.'' Id. at 4-5.
    Mr. Clarida also alleges legal infirmities with the ``free trial 
royalty rate of zero'' defined in proposed Sec.  385.21 \13\ and 
applied in proposed Sec.  385.24. Proposed Sec.  385.24, in his view, 
allows a record company, rather than the owner of a musical work, to 
permit use of that label's sound recordings gratis to ``promote the 
offering'' of a limited offering service, mixed service bundle, or paid 
locker service. Id. at 5. Mr. Clarida contends that this provision 
``does not even credibly further the statutory purpose of encouraging 
the sales of musical works.'' Id. He posits that proposed Sec.  385.24 
conceivably elevates technology companies and record companies to the 
status of joint copyright owners of the musical works, instead of mere 
licensees, thereby allowing licensees ``to usurp the copyright owner's 
exclusive rights with respect to works beyond the licensee's own 
phonorecords'' in violation of section 115 of the Copyright Act. Id. 5-
6 (footnote omitted).
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    \13\ Proposed Sec.  385.21 defines ``free trial royalty rate'' 
as ``the statutory royalty rate of zero in the case of certain free 
trial periods, as provided in Sec.  385.24.''
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    Mr. Clarida interprets section 115(c)(4) of the Copyright Act as 
requiring that even where distribution of a phonorecord is by rental, 
lease, or lending, the royalty must be calculated ``based on revenue 
generated `from every such act' of distribution of the phonorecord 
under this clause.'' Id. at 6 (emphasis omitted). He concludes that 
``the [proposed free trial royalty rate] does away with this required 
nexus between the distribution of specific phonorecords and the 
calculation of payment, allowing for extensive royalty-free use by 
compulsory licensees.'' Id. (footnote omitted).

Judges' Response

    The Judges find Mr. Clarida's challenges unavailing. A royalty rate 
of zero set for a statutory license, while not common, is not 
unprecedented under the Copyright Act. Indeed, in 2009 the Judges 
adopted the promotional royalty rate in Sec.  385.14 challenged here by 
Mr. Clarida. The Register reviewed the Judges' adoption of the zero 
rate, which is still in effect, and found no legal error in such 
action.\14\ See Review of Copyright Royalty Judges Determination, 
Notice; correction, Docket No. 2009-1, 74 FR 4537 (Jan. 26, 2009). See 
also Rate Adjustment for the Satellite Carrier Compulsory License, 
Final rule and order, Docket No. 96-3 CARP SRA, 62 FR 55742, 55753 
(Oct. 28, 1997) (the Librarian of Congress upheld the imposition by a 
Copyright Arbitration Royalty Panel of a zero royalty rate for the 
retransmission of certain distant signals by satellite carriers under 
the section 119 statutory license and accepted the Register's 
recommendation to adopt a zero royalty rate for certain local 
retransmissions of network signals.).
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    \14\ The Register suggested, in issuing an interim rule 
clarifying the definition of a ``digital phonorecord delivery,'' 
that a zero rate may be appropriate in certain circumstances. See 
Compulsory License for Making and Distributing Phonorecords, 
Including Digital Phonorecord Deliveries, Interim rule and request 
for comments, Docket No. RM 2000-7, 73 FR 66173, 66181 (Nov. 7, 
2008)(``[T]he Office would not dispute a finding that non-
interactive and interactive streams have different economic value, 
or even that a rate of zero might be appropriate for [digital 
phonorecord deliveries] made in the course of non-interactive 
streams.'').
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    The Judges also disagree with Mr. Clarida's assertion that other 
provisions of the Copyright Act, which create exceptions to the payment 
of royalties in other contexts, imply that the Judges cannot approve a 
settlement and adopt regulations in which a royalty rate of zero is 
established for certain promotions or trial periods under section 115 
of the Copyright Act. The fact that by granting exceptions Congress has 
determined, in effect, that in certain circumstances a royalty rate of 
zero must always apply does not imply that in all other circumstances a 
royalty rate of zero may never apply. Any mandatory statutory waiver of 
the payment of royalties in other contexts cannot serve to prohibit the 
Judges, in the exercise of their discretion, from incorporating into 
the regulations the terms of a settlement in which a zero royalty rate 
is established.\15\
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    \15\ As noted supra, a ``participant'' in this proceeding could 
have objected to the reasonableness of the rates and terms of the 
settlement and the proposed regulations. If a ``participant'' had 
raised such objections, the Judges would have considered those 
arguments, including any arguments as to any alleged failure of the 
zero royalty rates, combined with the associated promotional 
benefits, to provide reasonable economic compensation to a copyright 
owner under section 115 of the Copyright Act. However, Mr. Clarida 
and Gear chose not to participate and therefore they cannot make any 
cognizable argument as to the reasonableness of the combination of 
the proposed zero royalty rates and the associated promotional 
benefits.

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[[Page 67942]]

    Accordingly, the Judges conclude that nothing in the Copyright Act 
indicates that adoption of a zero royalty rate is contrary to section 
115 of the Copyright Act; and the Judges adopt, as published on May 17, 
2012, the provisions relating to the promotional and ``free trial'' 
royalty rates.

Mr. Clarida's Concerns Regarding Subpart C Activities

    Mr. Clarida charges that the use of the statutory license under 
section 115 of the Copyright Act by ``entirely new classes of `bundled' 
activity: So-called mixed service bundles, music bundles, paid locker 
services, and purchased content locker services'' violates the primary-
purpose requirement of section 115(a), which states ``[a] person may 
obtain a compulsory license only if his or her primary purpose in 
making phonorecords is to distribute them to the public for private 
use, including by means of a digital phonorecord delivery.'' Clarida 
Comments at 7. Such bundling, he concludes, results in ``an 
impermissible expansion of the scope'' of the section 115 license 
because many of the services in such bundles ``have nothing whatsoever 
to do with distributing phonorecords, and the services in their 
respective entireties are relieved of the statutory obligation to pay 
royalties based on specific individual music transactions.'' Id.
    The Judges do not agree with Mr. Clarida's assertion that the 
``primary purpose'' of the providers of the new classes of ``bundled'' 
activity is not to make phonorecords and distribute them to the public 
for private use. The fact that other services are bundled with that 
service does not cause any one of the bundled services to have primacy 
over any other of the bundled services. In that regard, Mr. Clarida 
does not propose a method by which the Judges could rank the 
``purposes'' of the several bundled services.
    Mr. Clarida also opposes the calculation of royalties proposed in 
Sec.  385.20(a), which would allow music bundle providers the option of 
paying for the ``components'' under the rates set forth in Subpart A of 
the proposed regulations or under the formula set forth in Subpart C of 
the proposal and would relieve those who distribute such bundles from 
paying for each phonorecord made or distributed. Clarida Comments at 7. 
Mr. Clarida also opposes the calculation of royalties under proposed 
Sec.  385.22 for the other proposed Subpart C activities, asserting 
that such calculation ``is utterly without support in the statute.'' 
Id. In particular, Mr. Clarida objects to the portion of the proposed 
royalty formula that would allow, for instance, mixed service bundles 
and locker services to determine a ``constructive number of plays,'' 
even though the actual number of uses are known, and then apply that 
number against ``a formula apportioning aggregate revenue from the 
service.'' Id. The main problem with this approach, in his view, is 
that information regarding the number of plays is not simply reported 
and paid for accordingly. Id.

Judges' Response

    Despite Mr. Clarida's objections, none of the challenged Subpart C 
provisions on their face appear to be contrary to the section 115 
license. As Mr. Clarida acknowledges, under the proposed regulations, 
the copyright owners would receive royalties for the musical works 
bundled with the other services. Mr. Clarida therefore is objecting to 
the ``reasonableness'' of those rates. As noted supra, since he and 
Gear were not ``participants'' to this proceeding, they cannot 
challenge the reasonableness of the rates and terms of the settlement.
    Therefore, the Judges adopt the settlement as proposed with the 
exception of the provisions that the Register found to be contrary to 
law.

List of Subjects in 37 CFR Part 385

    Copyright, Phonorecords, Recordings.

Final Regulations

    For the reasons set forth in the preamble, the Copyright Royalty 
Judges amend Part 385 of Chapter III of title 37 of the Code of Federal 
Regulations as follows:

PART 385--RATES AND TERMS FOR USE OF MUSICAL WORKS UNDER COMPULSORY 
LICENSE FOR MAKING AND DISTRIBUTING OF PHYSICAL AND DIGITAL 
PHONORECORDS

0
1. The authority citation for part 385 continues to read as follows:

    Authority: 17 U.S.C. 115, 801(b)(1), 804(b)(4).

Sec.  385.4  [Amended]

0
2. Section 385.4 is amended by removing ``(201.19(e)(7)(i)'' and adding 
``Sec.  201.19(e)(7)(i)'' in its place.

0
3. Revise the heading of Subpart B to read as follows:

Subpart B--Interactive Streaming and Limited Downloads

0
4. Section 385.10 is amended by revising paragraph (b) and adding 
paragraph (c) to read as follows:

Sec.  385.10  General.

* * * * *
    (b) Legal compliance. A licensee that, pursuant to 17 U.S.C. 115, 
makes or authorizes interactive streams or limited downloads of musical 
works through subscription or nonsubscription digital music services 
shall comply with the requirements of that section, the rates and terms 
of this subpart, and any other applicable regulations, with respect to 
such musical works and uses licensed pursuant to 17 U.S.C. 115.
    (c) Interpretation. This subpart is intended only to set rates and 
terms for situations in which the exclusive rights of a copyright owner 
are implicated and a compulsory license pursuant to 17 U.S.C. 115 is 
obtained. Neither this subpart nor the act of obtaining a license under 
17 U.S.C. 115 is intended to express or imply any conclusion as to the 
circumstances in which any of the exclusive rights of a copyright owner 
are implicated or a license, including a compulsory license pursuant to 
17 U.S.C. 115, must be obtained.

0
5. Section 385.11 is amended as follows:
0
a. By adding in alphabetical order definitions for ``Affiliate'', 
``Applicable consideration'', and ``GAAP'';
0
b. In paragraphs (1) and (2) of the definition of ``Limited download'', 
by adding ``provider'' after ``service'';
0
c. In the definition of ``Offering'', by removing ``service's'' and 
adding ``service provider's'' in its place, and by adding ``provider'' 
after ``service'';
0
d. By removing the definition of ``Publication date'';
0
e. In the definition of ``Relevant page'', by adding ``provider'' after 
``service'' in the first sentence and by removing ``users for limited 
downloads or interactive streams'' and adding ``users for licensed 
activity'' in its place in the second sentence;
0
f. By revising the term ``Service'', to read ``Service provider'';
0
g. Amend the definition of ``Service revenue'' by:
0
i. In paragraph (1) introductory text, by removing ``U.S. Generally 
Accepted Accounting Principles'' and adding ``GAAP'' in its place;
0
ii. In paragraphs (1)(i) and (ii), by adding ``provider'' after 
``service'';
0
iii. In paragraph (1)(iii), by adding ``provider'' after ``by the 
service'';

[[Page 67943]]

0
iv. In paragraph (2)(i), by removing ``service'' and adding ``service 
provider'' in its place each place it appears; and
0
v. In paragraph (5) introductory text, by removing ``In connection with 
such a bundle, if a record company providing sound recording rights to 
the service'' and by removing paragraphs (5)(i) and (ii).
    The additions read as follows:

Sec.  385.11  Definitions.

* * * * *
    Affiliate means an entity controlling, controlled by, or under 
common control with another entity, except that an affiliate of a 
record company shall not include a copyright owner of musical works to 
the extent it is engaging in business as to musical works.
    Applicable consideration means anything of value given for the 
identified rights to undertake the licensed activity, including, 
without limitation, ownership equity, monetary advances, barter or any 
other monetary and/or nonmonetary consideration, whether such 
consideration is conveyed via a single agreement, multiple agreements 
and/or agreements that do not themselves authorize the licensed 
activity but nevertheless provide consideration for the identified 
rights to undertake the licensed activity, and including any such value 
given to an affiliate of a record company for such rights to undertake 
the licensed activity. For the avoidance of doubt, value given to a 
copyright owner of musical works that is controlling, controlled by, or 
under common control with a record company for rights to undertake the 
licensed activity shall not be considered value given to the record 
company. Notwithstanding the foregoing, applicable consideration shall 
not include in-kind promotional consideration given to a record company 
(or affiliate thereof) that is used to promote the sale or paid use of 
sound recordings embodying musical works or the paid use of music 
services through which sound recordings embodying musical works are 
available where such in-kind promotional consideration is given in 
connection with a use that qualifies for licensing under 17 U.S.C. 115.
    GAAP means U.S. Generally Accepted Accounting Principles, except 
that if the U.S. Securities and Exchange Commission permits or requires 
entities with securities that are publicly traded in the U.S. to employ 
International Financial Reporting Standards, as issued by the 
International Accounting Standards Board, or as accepted by the 
Securities and Exchange Commission if different from that issued by the 
International Accounting Standards Board, in lieu of Generally Accepted 
Accounting Principles, then an entity may employ International 
Financial Reporting Standards as ``GAAP'' for purposes of this subpart.
* * * * *

0
6. Section 385.12 is amended as follows:
0
a. In paragraph (b) introductory text, by removing ``offering.'' and 
adding ``offering taking into consideration service revenue and 
expenses associated with such offering.'' in its place in the second 
sentence;
0
b. In paragraph (b)(1) introductory text, by removing ``Service.'' and 
adding ``Offering.'' in its place and by adding ``provider'' after 
``service'';
0
c. In paragraph (b)(1)(i), by removing ``revenue as'' and adding 
``revenue associated with the relevant offering as'' in its place;
0
d. In paragraph (b)(2):
0
i. By removing ``service, subtract'' and adding ``service provider, 
subtract'' in its place in the first sentence;
0
ii. By removing ``by the service'' in the first sentence;
0
iii. By removing ``While'' and adding ``Although'' in its place in the 
second sentence;
0
iv. By removing ``under its agreements with performing rights societies 
as defined in 17 U.S.C. 101'' in the second sentence; and
0
v. By removing ``In the latter case,'' and adding ``In the case where 
the service is also engaging in the public performance of musical works 
that does not constitute licensed activity,'' in its place in the third 
sentence;
0
e. In paragraph (b)(3) introductory text, by removing ``This is'' and 
adding ``The payable royalty pool is'' in its place and by adding 
``provider'' after ``service'';
0
f. In paragraph (b)(4), by removing ``used by the service'' and adding 
``used by the service provider'' in its place each place it appears, by 
removing ``on or after October 1, 2010'' in the fourth sentence, and by 
removing ``if the service is'' and adding ``if the service provider 
is'' in the fifth sentence;
0
g. By revising paragraph (c); and
0
h. In paragraph (d) introductory text, by removing ``For licensed 
activity on or after October 1, 2010, for'' and adding ``For'' in its 
place.
    The revision reads as follows:

Sec.  385.12  Calculation of royalty payments in general.

* * * * *
    (c) Percentage of service revenue. The percentage of service 
revenue applicable under paragraph (b) of this section is 10.5%.
* * * * *

0
7. Section 385.13 is amended as follows:
0
a. In paragraphs (a)(1) through (5), by removing ``Sec.  385.12(b)(1)'' 
and adding ``Sec.  385.12(b)(1)(ii)'' in its place each place it 
appears, and by removing ``Sec.  385.12(b)(3)'' and adding ``Sec.  
385.12(b)(3)(ii)'' in its place each place it appears;
0
b. In paragraph (a)(4):
0
i. By adding ``providing licensed activity that is'' before ``made 
available to end users'' in the first sentence;
0
ii. By adding ``(including products or services subject to other 
subparts)'' before ``as part of a single transaction'' in the first 
sentence;
0
iii. By removing ``subscription service separate'' and adding 
``subscription service providing licensed activity separate'' in its 
place in the first sentence; and
0
iv. By removing ``subscription service for a single price'' and adding 
``subscription service providing licensed activity for a single price'' 
in its place in the first sentence;
0
c. By revising paragraphs (b) and (c);
0
d. By redesignating paragraph (d) as paragraph (e);
0
e. By adding a new paragraph (d); and
0
f. In newly redesignated paragraph (e):
0
i. By removing ``the service shall for the relevant offering calculate 
its'' and adding ``the'' in its place in the first sentence; and
0
ii. By adding ``shall be calculated,'' before ``taking into account'' 
in the first sentence.
    The revisions and additions read as follows:

Sec.  385.13  Minimum royalty rates and subscriber-based royalty floors 
for specific types of services.

* * * * *
    (b) Computation of subminimum I. For purposes of paragraphs (a)(2), 
(3), and (4) of this section, subminimum I for an accounting period 
means the aggregate of the following with respect to all sound 
recordings of musical works used in the relevant offering of the 
service provider during the accounting period--
    (1) In cases in which the record company is the licensee under 17 
U.S.C. 115 and the record company has granted the rights to make 
interactive streams or limited downloads of a sound recording through 
the third-party service together with the right to reproduce and 
distribute the musical work embodied therein, 17.36% of the total 
amount expensed by the service provider or any of its affiliates in 
accordance with

[[Page 67944]]

GAAP for such rights for the accounting period, which amount shall 
equal the applicable consideration for such rights at the time such 
applicable consideration is properly recognized as an expense under 
GAAP.
    (2) In cases in which the record company is not the licensee under 
17 U.S.C. 115 and the record company has granted the rights to make 
interactive streams or limited downloads of a sound recording through 
the third-party service without the right to reproduce and distribute 
the musical work embodied therein, 21% of the total amount expensed by 
the service provider or any of its affiliates in accordance with GAAP 
for such rights for the accounting period, which amount shall equal the 
applicable consideration for such rights at the time such applicable 
consideration is properly recognized as an expense under GAAP.
    (c) Computation of subminimum II. For purposes of paragraphs (a)(1) 
and (5) of this section, subminimum II for an accounting period means 
the aggregate of the following with respect to all sound recordings of 
musical works used in the relevant offering of the service provider 
during the accounting period--
    (1) In cases in which the record company is the licensee under 17 
U.S.C. 115 and the record company has granted the rights to make 
interactive streams and limited downloads of a sound recording through 
the third-party service together with the right to reproduce and 
distribute the musical work embodied therein, 18% of the total amount 
expensed by the service provider or any of its affiliates in accordance 
with GAAP for such rights for the accounting period, which amount shall 
equal the applicable consideration for such rights at the time such 
applicable consideration is properly recognized as an expense under 
GAAP.
    (2) In cases in which the record company is not the licensee under 
17 U.S.C. 115 and the record company has granted the rights to make 
interactive streams or limited downloads of a sound recording through 
the third-party service without the right to reproduce and distribute 
the musical work embodied therein, 22% of the total amount expensed by 
the service provider or any of its affiliates in accordance with GAAP 
for such rights for the accounting period, which amount shall equal the 
applicable consideration for such rights at the time such applicable 
consideration is properly recognized as an expense under GAAP.
    (d) Payments made by third parties. If a record company providing 
sound recording rights to the service provider for a licensed 
activity--
    (1) Recognizes revenue (in accordance with GAAP, and including for 
the avoidance of doubt all applicable consideration with respect to 
such rights for the accounting period, regardless of the form or timing 
of payment) from a person or entity other than the service provider 
providing the licensed activity and its affiliates, and
    (2) Such revenue is received, in the context of the transactions 
involved, as applicable consideration for such rights,
    (3) Then such revenue shall be added to the amounts expensed by the 
service provider solely for purposes of paragraphs(b)(1), (b)(2), 
(c)(1), or (c)(2) of this section, as applicable, if not already 
included in such expensed amounts. Where the service provider is the 
licensee, if the service provider provides the record company all 
information necessary for the record company to determine whether 
additional royalties are payable by the service provider hereunder as a 
result of revenue recognized from a person or entity other than the 
service provider as described in the immediately preceding sentence, 
then the record company shall provide such further information as 
necessary for the service provider to calculate the additional 
royalties and indemnify the service provider for such additional 
royalties. The sole obligation of the record company shall be to pay 
the licensee such additional royalties if actually payable as royalties 
hereunder; provided, however, that this shall not affect any otherwise 
existing right or remedy of the copyright owner nor diminish the 
licensee's obligations to the copyright owner.
* * * * *

0
8. Section 385.14 is amended as follows:
0
a. In paragraph (a)(1)(iii), by removing ``service'' and adding 
``service provider'' in its place each place it appears;
0
b. In paragraph (a)(1)(iii)(A), by removing ``commencing on or after 
October 1, 2010, except'' and adding ``other than'' in its place;
0
c. In paragraph (a)(3):
0
i. By removing ``the service shall provide'' and adding ``the service 
provider shall provide'' in its place in the first sentence;
0
ii. By removing ``the service shall have'' and adding ``the service 
provider shall have'' in its place in the first sentence;
0
iii. By removing ``service does not provide'' and adding ``service 
provider does not provide'' in its place in the second sentence; and
0
iv. By removing ``the service (but'' and adding ``the service provider 
(but'' in its place in the second sentence;
0
d. By revising paragraph (b)(1);
0
e. In paragraph (b)(4), by removing ``the service, and not'' and adding 
``the service provider, and not'' in its place in the second sentence; 
and
0
f. By revising paragraph (d).
    The revisions read as follows:

Sec.  385.14  Promotional royalty rate.

* * * * *
    (b) * * *
    (1) No applicable consideration for making or authorizing the 
relevant interactive streams or limited downloads is received by the 
record company, any of its affiliates, or any other person or entity 
acting on behalf of or in lieu of the record company, except for in-
kind promotional consideration given to a record company (or affiliate 
thereof) that is used to promote the sale or paid use of sound 
recordings or the paid use of music services through which sound 
recordings are available;
* * * * *
    (d) Interactive streaming of clips. In addition to those in 
paragraph (a) of this section, the provisions of this paragraph (d) 
apply to interactive streaming conducted or authorized by record 
companies under the promotional royalty rate of segments of sound 
recordings of musical works with a playing time that does not exceed 90 
seconds. Such interactive streams may be made or authorized by a record 
company under the promotional royalty rate without any of the temporal 
limitations set forth in paragraphs (b) and (c) of this section (but 
subject to the other conditions of paragraphs (b) and (c) of this 
section, as applicable). For clarity, this paragraph (d) is strictly 
limited to the uses described herein and shall not be construed as 
permitting the creation or use of an excerpt of a musical work in 
violation of 17 U.S.C. 106(2) or 115(a)(2) or any other right of a 
musical work owner.

0
9. Add Subpart C to read as follows:
Subpart C--Limited Offerings, Mixed Service Bundles, Music Bundles, 
Paid Locker Services and Purchased Content Locker Services
Sec.
385.20 General.
385.21 Definitions.
385.22 Calculation of royalty payments in general.
385.23 Royalty rates and subscriber-based royalty floors for 
specific types of services.
385.24 Free trial periods.
385.25 Reproduction and distribution rights covered.

[[Page 67945]]

385.26 Effect of rates.

Subpart C--Limited Offerings, Mixed Service Bundles, Music Bundles, 
Paid Locker Services and Purchased Content Locker Services

Sec.  385.20  General.

    (a) Scope. This subpart establishes rates and terms of royalty 
payments for certain reproductions or distributions of musical works 
through limited offerings, mixed service bundles, music bundles, paid 
locker services and purchased content locker services provided in 
accordance with the provisions of 17 U.S.C. 115. For the avoidance of 
doubt, to the extent that product configurations for which rates are 
specified in subpart A of this part are included within licensed 
subpart C activity, as defined in Sec.  385.21, the rates specified in 
subpart A of this part shall not apply, except that in the case of a 
music bundle the compulsory licensee may elect to pay royalties for the 
music bundle pursuant to subpart C of this part or for the components 
of the bundle pursuant to subpart A of this part.
    (b) Legal compliance. A licensee that, pursuant to 17 U.S.C. 115, 
makes or authorizes reproduction or distribution of musical works in 
limited offerings, mixed service bundles, music bundles, paid locker 
services or purchased content locker services shall comply with the 
requirements of that section, the rates and terms of this subpart, and 
any other applicable regulations, with respect to such musical works 
and uses licensed pursuant to 17 U.S.C. 115.
    (c) Interpretation. This subpart is intended only to set rates and 
terms for situations in which the exclusive rights of a copyright owner 
are implicated and a compulsory license pursuant to 17 U.S.C. 115 is 
obtained. Neither this subpart nor the act of obtaining a license under 
17 U.S.C. 115 is intended to express or imply any conclusion as to the 
circumstances in which any of the exclusive rights of a copyright owner 
are implicated or a license, including a compulsory license pursuant to 
17 U.S.C. 115, must be obtained.

Sec.  385.21  Definitions.

    For purposes of this subpart, the following definitions shall 
apply:
    Affiliate shall have the meaning given in Sec.  385.11.
    Applicable consideration shall have the meaning given in Sec.  
385.11, except that for purposes of this subpart C, references in the 
definition of ``Applicable consideration'' in Sec.  385.11 to licensed 
activity shall mean licensed subpart C activity, as defined in this 
section.
    Free trial royalty rate means the statutory royalty rate of zero in 
the case of certain free trial periods, as provided in Sec.  385.24.
    GAAP shall have the meaning given in Sec.  385.11.
    Interactive stream shall have the meaning given in Sec.  385.11.
    Licensee shall have the meaning given in Sec.  385.11.
    Licensed subpart C activity means, referring to subpart C of this 
part--
    (1) In the case of a limited offering, the applicable interactive 
streams or limited downloads;
    (2) In the case of a locker service, the applicable interactive 
streams, permanent digital downloads, restricted downloads or 
ringtones;
    (3) In the case of a music bundle, the applicable reproduction or 
distribution of a physical phonorecord, permanent digital download or 
ringtone; and
    (4) In the case of a mixed service bundle, the applicable--
    (i) Permanent digital downloads;
    (ii) Ringtones;
    (iii) To the extent a limited offering is included in a mixed 
service bundle, interactive streams or limited downloads; or
    (iv) To the extent a locker service is included in a mixed service 
bundle, interactive streams, permanent digital downloads, restricted 
downloads or ringtones.
    Limited download shall have the meaning given in Sec.  385.11.
    Limited offering means a subscription service providing interactive 
streams or limited downloads where--
    (1) An end user is not provided the opportunity to listen to a 
particular sound recording chosen by the end user at a time chosen by 
the end user (i.e., the service does not provide interactive streams of 
individual recordings that are on-demand, and any limited downloads are 
rendered only as part of programs rather than as individual recordings 
that are on-demand); or
    (2) The particular sound recordings available to the end user over 
a period of time are substantially limited relative to services in the 
marketplace providing access to a comprehensive catalog of recordings 
(e.g., a service limited to a particular genre, or permitting 
interactive streaming only from a monthly playlist consisting of a 
limited set of recordings).
    Locker service means a service providing access to sound recordings 
of musical works in the form of interactive streams, permanent digital 
downloads, restricted downloads or ringtones, where the service has 
reasonably determined that phonorecords of the applicable sound 
recordings have been purchased by the end user or are otherwise in the 
possession of the end user prior to the end user's first request to 
access such sound recordings by means of the service. The term locker 
service does not extend to any part of a service otherwise meeting this 
definition as to which a license is not obtained for the applicable 
reproductions and distributions of musical works.
    Mixed service bundle means an offering of one or more of permanent 
digital downloads, ringtones, locker services or limited offerings, 
together with one or more of non-music services (e.g., Internet access 
service, mobile phone service) or non-music products (e.g., a device 
such as a phone) of more than token value, that is provided to users as 
part of one transaction without pricing for the music services or music 
products separate from the whole offering.
    Music bundle means an offering of two or more of physical 
phonorecords, permanent digital downloads or ringtones provided to 
users as part of one transaction (e.g., download plus ringtone, CD plus 
downloads). A music bundle must contain at least two different product 
configurations and cannot be combined with any other offering 
containing licensed activity under subpart B of this part or subpart C 
of this part.
    (1) In the case of music bundles containing one or more physical 
phonorecords, the physical phonorecord component of the music bundle 
must be sold under a single catalog number, and the musical works 
embodied in the digital phonorecord delivery configurations in the 
music bundle must be the same as, or a subset of, the musical works 
embodied in the physical phonorecords; provided that when the music 
bundle contains a set of digital phonorecord deliveries sold by the 
same record company under substantially the same title as the physical 
phonorecord (e.g., a corresponding digital album), up to 5 sound 
recordings of musical works that are included in the stand-alone 
version of such set of digital phonorecord deliveries but are not 
included on the physical phonorecord may be included among the digital 
phonorecord deliveries in the music bundle. In addition, the seller 
must permanently part with possession of the physical phonorecord or 
phonorecords sold as part of the music bundle.
    (2) In the case of music bundles composed solely of digital 
phonorecord deliveries, the number of digital phonorecord deliveries in 
either configuration cannot exceed 20, and the musical works embodied 
in each

[[Page 67946]]

configuration in the music bundle must be the same as, or a subset of, 
the musical works embodied in the configuration containing the most 
musical works.
    Paid locker service means a locker service that is a subscription 
service.
    Permanent digital download shall have the meaning given in Sec.  
385.2.
    Purchased content locker service means a locker service made 
available to end-user purchasers of permanent digital downloads, 
ringtones or physical phonorecords at no incremental charge above the 
otherwise applicable purchase price of the permanent digital downloads, 
ringtones or physical phonorecords, with respect to the sound 
recordings embodied in permanent digital downloads or ringtones or 
physical phonorecords purchased from a qualifying seller as described 
in paragraph (1) of this definition of ``Purchased content locker 
service,'' whereby the locker service enables the purchaser to engage 
in one or both of the qualifying activities indentified in paragraph 
(2) of this definition of ``Purchased content locker service.'' In 
addition, in the case of a locker service made available to end-user 
purchasers of physical phonorecords, the seller must permanently part 
with possession of the physical phonorecords.
    (1) A qualifying seller for purposes of this definition of 
``purchased content locker service'' is the same entity operating such 
locker service, one of its affiliates or predecessors, or--
    (i) In the case of permanent digital downloads or ringtones, a 
seller having another legitimate connection to the locker service 
provider set forth in one or more written agreements (including that 
the locker service and permanent digital downloads or ringtones are 
offered through the same third party); or
    (ii) In the case of physical phonorecords, a seller having an 
agreement with--
    (A) The locker service provider whereby such parties establish an 
integrated offer that creates a consumer experience commensurate with 
having the same service both sell the physical phonorecord and offer 
the locker service; or
    (B) A service provider that also has an agreement with the entity 
offering the locker service, where pursuant to those agreements the 
service provider has established an integrated offer that creates a 
consumer experience commensurate with having the same service both sell 
the physical phonorecord and offer the locker service.
    (2) Qualifying activity for purposes of this definition of 
``purchased content locker service'' is enabling the purchaser to--
    (i) Receive one or more additional phonorecords of such purchased 
sound recordings of musical works in the form of permanent digital 
downloads or ringtones at the time of purchase, or
    (ii) Subsequently access such purchased sound recordings of musical 
works in the form of interactive streams, additional permanent digital 
downloads, restricted downloads or ringtones.
    Record company shall have the meaning given in Sec.  385.11.
    Restricted download means a digital phonorecord delivery 
distributed in the form of a download that may not be retained and 
played on a permanent basis. The term restricted download includes a 
limited download.
    Ringtone shall have the meaning given in Sec.  385.2.
    Service provider shall have the meaning given in Sec.  385.11, 
except that for purposes of this subpart references in the definition 
of ``Service provider'' in Sec.  385.11 to licensed activity and 
service revenue shall mean licensed subpart C activity, as defined in 
this section, and subpart C service revenue, as defined in this 
section, respectively.
    Subpart C offering means, referring to subpart C of this part, a 
service provider's offering of licensed subpart C activity, as defined 
in this section, that is subject to a particular rate set forth in 
Sec.  385.23(a) (e.g., a particular subscription plan available through 
the service provider).
    Subpart C relevant page means, referring to subpart C of this part, 
a page (including a Web page, screen or display) from which licensed 
subpart C activity, as defined in this section, offered by a service 
provider is directly available to end users, but only where the 
offering of licensed subpart C activity, as defined in this section, 
and content that directly relates to the offering of licensed subpart C 
activity, as defined in this section, (e.g., an image of the artist or 
artwork closely associated with such offering, artist or album 
information, reviews of such offering, credits and music player 
controls) comprises 75% or more of the space on that page, excluding 
any space occupied by advertising. A licensed subpart C activity, as 
defined in this section, is directly available to end users from a page 
if sound recordings of musical works can be accessed by end users for 
licensed subpart C activity, as defined in this section, from such page 
(in most cases this will be the page where the transmission takes 
place).
    Subpart C service revenue. (1) Subject to paragraphs (2) through 
(6) of the definition of ``Subpart C service revenue,'' as defined in 
this section, and subject to GAAP, subpart C service revenue shall 
mean, referring to subpart C of this part, the following:
    (i) All revenue recognized by the service provider from end users 
from the provision of licensed subpart C activity, as defined in this 
section;
    (ii) All revenue recognized by the service provider by way of 
sponsorship and commissions as a result of the inclusion of third-party 
``in-stream'' or ``in-download'' advertising as part of licensed 
subpart C activity, as defined in this section, (i.e., advertising 
placed immediately at the start, end or during the actual delivery, by 
way of transmissions of a musical work that constitute licensed subpart 
C activity, as defined in this section); and
    (iii) All revenue recognized by the service provider, including by 
way of sponsorship and commissions, as a result of the placement of 
third-party advertising on a subpart C relevant page, as defined in 
this section, of the service or on any page that directly follows such 
subpart C relevant page, as defined in this section, leading up to and 
including the transmission of a musical work that constitutes licensed 
subpart C activity, as defined in this section; provided that, in the 
case where more than one service is actually available to end users 
from a subpart C relevant page, as defined in this section, any 
advertising revenue shall be allocated between such services on the 
basis of the relative amounts of the page they occupy.
    (2) In each of the cases identified in paragraph (1) of the 
definition of ``Subpart C service revenue,'' of this section such 
revenue shall, for the avoidance of doubt,
    (i) Include any such revenue recognized by the service provider, or 
if not recognized by the service provider, by any associate, affiliate, 
agent or representative of such service provider in lieu of its being 
recognized by the service provider;
    (ii) Include the value of any barter or other nonmonetary 
consideration;
    (iii) Not be reduced by credit card commissions or similar payment 
process charges; and
    (iv) Except as expressly set forth in this subpart, not be subject 
to any other deduction or set-off other than refunds to end users for 
licensed subpart C activity, as defined in this section, that they were 
unable to use due to technical faults in the licensed subpart C 
activity, as defined in this section, or other bona fide refunds or 
credits issued to end users in the ordinary course of business.

[[Page 67947]]

    (3) In each of the cases identified in paragraph (1) of the 
definition of ``Subpart C service revenue'' of this section, such 
revenue shall, for the avoidance of doubt, exclude revenue derived 
solely in connection with services and activities other than licensed 
subpart C activity, as defined in this section, provided that 
advertising or sponsorship revenue shall be treated as provided in 
paragraphs (2) and (4) of the definition of ``Subpart C service 
revenue'' of this section. By way of example, the following kinds of 
revenue shall be excluded:
    (i) Revenue derived from non-music voice, content and text 
services;
    (ii) Revenue derived from other non-music products and services 
(including search services, sponsored searches and click-through 
commissions);
    (iii) Revenue generated from the sale of actual locker service 
storage space to the extent that such storage space is sold at a 
separate retail price;
    (iv) In the case of a locker service, revenue derived from the sale 
of permanent digital downloads or ringtones; and
    (v) Revenue derived from other music or music-related products and 
services that are not or do not include licensed subpart C activity, as 
defined in this section.
    (4) For purposes of paragraph (1) of the definition of ``Subpart C 
service revenue'' of this section, advertising or sponsorship revenue 
shall be reduced by the actual cost of obtaining such revenue, not to 
exceed 15%.
    (5) In the case of a mixed service bundle, the revenue deemed to be 
recognized from end users for the service for the purpose of the 
definition in paragraph (1) of the definition of ``Subpart C service 
revenue'' of this section shall be the greater of--
    (i) The revenue recognized from end users for the mixed service 
bundle less the standalone published price for end users for each of 
the non-music product or non-music service components of the bundle; 
provided that, if there is no such standalone published price for a 
non-music component of the bundle, then the average standalone 
published price for end users for the most closely comparable non-music 
product or non-music service in the U.S. shall be used or, if more than 
one such comparable exists, the average of such standalone prices for 
such comparables shall be used; and
    (ii) Either--
    (A) In the case of a mixed service bundle that either has 750,000 
subscribers or other registered users, or is reasonably expected to 
have 750,000 subscribers or other registered users within 1 year after 
commencement of the mixed service bundle, 40% of the standalone 
published price of the licensed music component of the bundle (i.e., 
the permanent digital downloads, ringtones, locker service or limited 
offering); provided that, if there is no such standalone published 
price for the licensed music component of the bundle, then the average 
standalone published price for end users for the most closely 
comparable licensed music component in the U.S. shall be used or, if 
more than one such comparable exists, the average of such standalone 
prices for such comparables shall be used; and further provided that in 
any case in which royalties were paid based on this paragraph due to a 
reasonable expectation of reaching 750,000 subscribers or other 
registered users within 1 year after commencement of the mixed service 
bundle and that does not actually happen, applicable payments shall, in 
the accounting period next following the end of such 1-year period, 
retroactively be adjusted as if paragraph (5)(ii)(B) of the definition 
of ``Subpart C service revenue'' of this section applied; or
    (B) Otherwise, 50% of the standalone published price of the 
licensed music component of the bundle (i.e., the permanent digital 
downloads, ringtones, locker service or limited offering); provided 
that, if there is no such standalone published price for the licensed 
music component of the bundle, then the average standalone published 
price for end users for the most closely comparable licensed music 
component in the U.S. shall be used or, if more than one such 
comparable exists, the average of such standalone prices for such 
comparables shall be used.
    (6) In the case of a music bundle containing a physical 
phonorecord, where the music bundle is distributed by a record company 
for resale and the record company is the compulsory licensee--
    (i) Service revenue shall be 150% of the record company's wholesale 
revenue from the music bundle; and
    (ii) The times at which distribution and revenue recognition are 
deemed to occur shall be in accordance with Sec.  201.19 of this title.
    Subscription service means a digital music service for which end 
users are required to pay a fee to access the service for defined 
subscription periods of 3 years or less (in contrast to, for example, a 
service where the basic charge to users is a payment per download or 
per play), whether such payment is made for access to the service on a 
standalone basis or as part of a bundle with one or more other products 
or services, and including any use of such a service on a trial basis 
without charge as described in Sec.  385.24.

Sec.  385.22  Calculation of royalty payments in general.

    (a) Applicable royalty. Licensees that make or authorize licensed 
subpart C activity, as defined in Sec.  385.21, pursuant to 17 U.S.C. 
115 shall pay royalties therefor that are calculated as provided in 
this section, subject to the royalty rates and subscriber-based royalty 
floors for specific types of services provided in Sec.  385.23, except 
as provided for certain free trial periods in Sec.  385.24.
    (b) Rate calculation methodology. Royalty payments for licensed 
subpart C activity, as defined in Sec.  385.21, shall be calculated as 
provided in this paragraph (b). If a service provides different subpart 
C offerings, as defined in Sec.  385.21, royalties must be separately 
calculated with respect to each such subpart C offering, as defined in 
Sec.  385.21, taking into consideration service revenue and expenses 
associated with such offering. Uses subject to the free trial royalty 
rate shall be excluded from the calculation of royalties due, as 
further described in this section and Sec.  385.23.
    (1) Step 1: Calculate the All-In Royalty for the Subpart C 
Offering, as Defined in Sec.  385.21. For each accounting period, the 
all-in royalty for each subpart C offering, as defined in Sec.  385.21, 
of the service provider is the greater of:
    (i) The applicable percentage of subpart C service revenue, as 
defined in Sec.  385.21, associated with the relevant offering as set 
forth in Sec.  385.23(a) (excluding any subpart C service revenue, as 
defined in Sec.  385.21, derived solely from licensed subpart C 
activity, as defined in Sec.  385.21, uses subject to the free trial 
royalty rate); and
    (ii) The minimum specified in Sec.  385.23(a) for the subpart C 
offering, as defined in Sec.  385.21, involved.
    (2) Step 2: Subtract applicable performance royalties to determine 
the payable royalty pool, which is the amount payable for the 
reproduction and distribution of all musical works used by the service 
provider by virtue of its licensed subpart C activity, as defined in 
Sec.  385.21, for a particular subpart C offering, as defined in Sec.  
385.21, during the accounting period. From the amount determined in 
step 1 in paragraph (b)(1) of this section, for each subpart C 
offering, as defined in Sec.  385.21, of the service provider, subtract 
the total amount of royalties for public performance of musical works 
that has been or will be expensed

[[Page 67948]]

pursuant to public performance licenses in connection with uses of 
musical works through such subpart C offering, as defined in Sec.  
385.21, during the accounting period that constitute licensed subpart C 
activity, as defined in Sec.  385.21, (other than licensed subpart C 
activity, as defined in Sec.  385.21, subject to the free trial royalty 
rate), or in connection with previewing of such subpart C offering, as 
defined in Sec.  385.21, during the accounting period. Although this 
amount may be the total of the payments with respect to the service for 
that subpart C offering, as defined in Sec.  385.21, for the accounting 
period, it will be less than the total of such public performance 
payments if the service is also engaging in public performance of 
musical works that does not constitute licensed subpart C activity, as 
defined in Sec.  385.21, or previewing of such licensed subpart C 
activity, as defined in Sec.  385.21. In the case where the service is 
also engaging in the public performance of musical works that does not 
constitute licensed subpart C activity, as defined in Sec.  385.21, the 
amount to be subtracted for public performance payments shall be the 
amount of such payments allocable to licensed subpart C activity, as 
defined in Sec.  385.21, uses (other than free trial royalty rate 
uses), and previewing of such uses, in connection with the relevant 
subpart C offering, as defined in Sec.  385.21, as determined in 
relation to all uses of musical works for which the public performance 
payments are made for the accounting period. Such allocation shall be 
made on the basis of plays of musical works or, where per-play 
information is unavailable due to bona fide technical limitations as 
described in step 3 in paragraph (b)(3) of this section, using the same 
alternative methodology as provided in step 3 in paragraph (b)(3) of 
this section.
    (3) Step 3: Calculate the Per-Work Royalty Allocation for Each 
Relevant Work. This is the amount payable for the reproduction and 
distribution of each musical work used by the service provider by 
virtue of its licensed subpart C activity, as defined in Sec.  385.21, 
through a particular subpart C offering, as defined in Sec.  385.21, 
during the accounting period. To determine this amount, the result 
determined in step 2 in paragraph (b)(2) of this section must be 
allocated to each musical work used through the subpart C offering, as 
defined in Sec.  385.21. The allocation shall be accomplished as 
follows:
    (i) In the case of limited offerings (but not limited offerings 
that are part of mixed service bundles), by dividing the payable 
royalty pool determined in step 2 in paragraph (b)(2) of this section 
for such offering by the total number of plays of all musical works 
through such offering during the accounting period (other than free 
trial royalty rate plays) to yield a per-play allocation, and 
multiplying that result by the number of plays of each musical work 
(other than free trial royalty rate plays) through the offering during 
the accounting period. For purposes of determining the per-work royalty 
allocation in all calculations under this step 3 only (i.e., after the 
payable royalty pool has been determined), for sound recordings of 
musical works with a playing time of over 5 minutes, each play shall be 
counted as provided in paragraph (c) of this section. Notwithstanding 
the foregoing, if the service provider is not capable of tracking play 
information due to bona fide limitations of the available technology 
for services of that nature or of devices usable with the service, the 
per-work royalty allocation may instead be accomplished in a manner 
consistent with the methodology used by the service provider for making 
royalty payment allocations for the use of individual sound recordings.
    (ii) In the case of mixed service bundles and locker services, by--
    (A) Determining a constructive number of plays of all licensed 
musical works that is the sum of the total number of interactive 
streams of all licensed musical works made through such offering during 
the accounting period (other than free trial royalty rate interactive 
streams), plus the total number of plays of restricted downloads of all 
licensed musical works made through such offering during the accounting 
period as to which the service provider tracks plays (other than free 
trial royalty rate restricted downloads), plus 5 times the total number 
of downloads of all licensed musical works made through such offering 
during the accounting period as to which the service provider does not 
track plays (other than free trial royalty rate downloads);
    (B) Determining a constructive per-play allocation that is the 
payable royalty pool determined in step 2 of paragraph (b)(2) of this 
section for such offering divided by the constructive number of plays 
of all licensed musical works determined in paragraph (b)(3)(ii)(A) of 
this section;
    (C) For each licensed musical work, determining a constructive 
number of plays of that musical work that is the sum of the total 
number of interactive streams of such licensed musical work made 
through such offering during the accounting period (other than free 
trial royalty rate interactive streams), plus the total number of plays 
of restricted downloads of such licensed musical work made through such 
offering during the accounting period as to which the service provider 
tracks plays (other than free trial royalty rate restricted downloads), 
plus 5 times the total number of downloads of such licensed musical 
work made through such offering during the accounting period as to 
which the service provider does not track plays (other than free trial 
royalty rate downloads); and
    (D) For each licensed musical work, determining the per-work 
royalty allocation by multiplying the constructive per-play allocation 
determined in paragraph (b)(3)(ii)(B) of this section by the 
constructive number of plays of that musical work determined in 
paragraph (b)(3)(ii)(C) of this section.
    (E) Notwithstanding the foregoing, if a service provider offers 
both a paid locker service and a purchased content locker service, and 
with respect to the purchased content locker service there is no 
subpart C service revenue, as defined in Sec.  385.21, and the 
applicable subminimum is zero dollars, then the service provider shall 
be permitted to include within the calculation of constructive plays 
under paragraphs (b)(3)(ii)(A) and (C) of this section for the paid 
locker service, the licensed subpart C activity, as defined in Sec.  
385.21, made through the purchased content locker service (i.e., the 
total number of interactive streams of all licensed musical works made 
through the purchased content locker service during the accounting 
period (other than free trial royalty rate interactive streams), plus 
the total number of plays of restricted downloads of all licensed 
musical works made through the purchased content locker service during 
the accounting period as to which the service provider tracks plays 
(other than free trial royalty rate restricted downloads), plus 5 times 
the total number of downloads of all licensed musical works made 
through the purchased content locker service during the accounting 
period as to which the service provider does not track plays (other 
than free trial royalty rate downloads)); provided that the relevant 
licensed subpart C activity, as defined in Sec.  385.21, made through 
the purchased content locker service is similarly included within the 
play calculation for the paid locker service for the corresponding 
sound recording rights.
    (iii) In the case of music bundles, by--
    (A) Allocating the payable royalty pool determined in step 2 of 
paragraph (b)(2) of this section to separate pools for each type of 
product configuration

[[Page 67949]]

included in the music bundle (e.g., CD, permanent digital download, 
ringtone) in accordance with the ratios that the standalone published 
prices of the products that are included in the music bundle bear to 
each other; provided that, if there is no such standalone published 
price for such a product, then the average standalone published price 
for end users for the most closely comparable product in the U.S. shall 
be used or, if more than one such comparable exists, the average of 
such standalone prices for such comparables shall be used; and
    (B) Allocating the product configuration pools determined in 
paragraph (b)(3)(iii)(A) of this section to individual musical works by 
dividing each such pool by the total number of sound recordings of 
musical works included in products of that configuration in the music 
bundle.
    (c) Overtime adjustment. For purposes of the calculations in step 3 
of paragraph (b)(3)(i) of this section only, for sound recordings of 
musical works with a playing time of over 5 minutes, adjust the number 
of plays as follows:
    (1) 5:01 to 6:00 minutes--Each play = 1.2 plays
    (2) 6:01 to 7:00 minutes--Each play = 1.4 plays
    (3) 7:01 to 8:00 minutes--Each play = 1.6 plays
    (4) 8:01 to 9:00 minutes--Each play = 1.8 plays
    (5) 9:01 to 10:00 minutes--Each play = 2.0 plays
    (6) For playing times of greater than 10 minutes, continue to add 
.2 plays for each additional minute or fraction thereof.

Sec.  385.23  Royalty rates and subscriber-based royalty floors for 
specific types of services.

    (a) In general. The following royalty rates and subscriber-based 
royalty floors shall apply to the following types of licensed subpart C 
activity, as defined in Sec.  385.21:
    (1) Mixed service bundle. In the case of a mixed service bundle, 
the percentage of subpart C service revenue, as defined in Sec.  
385.21, applicable in step 1 of Sec.  385.22(b)(1)(i) is 11.35%. The 
minimum for use in step 1 of Sec.  385.22(b)(1)(ii) is the appropriate 
subminimum as described in paragraph (b) of this section for the 
accounting period, where the all-in percentage applicable to Sec.  
385.23(b)(1) is 17.36%, and the sound recording-only percentage 
applicable to Sec.  385.23(b)(2) is 21%.
    (2) Music bundle. In the case of a music bundle, the percentage of 
subpart C service revenue, as defined in Sec.  385.21, applicable in 
step 1 of Sec.  385.22(b)(1)(i) is 11.35%. The minimum for use in step 
1 of Sec.  385.22(b)(1)(ii) is the appropriate subminimum as described 
in paragraph (b) of this section for the accounting period, where the 
all-in percentage applicable to Sec.  385.23(b)(1) and (3) is 17.36%, 
and the sound recording-only percentage applicable to Sec.  
385.23(b)(2) is 21%.
    (3) Limited offering. In the case of a limited offering, the 
percentage of subpart C service revenue, as defined in Sec.  385.21, 
applicable in step 1 of Sec.  385.22(b)(1)(i) is 10.5%. The minimum for 
use in step 1 of Sec.  385.22(b)(1)(ii) is the greater of--
    (i) The appropriate subminimum as described in paragraph (b) of 
this section for the accounting period, where the all-in percentage 
applicable to Sec.  385.23(b)(1) is 17.36%, and the sound recording-
only percentage applicable to Sec.  385.23(b)(2) is 21%; and
    (ii) The aggregate amount of 18 cents per subscriber per month.
    (4) Paid locker service. In the case of a paid locker service, the 
percentage of subpart C service revenue, as defined in Sec.  385.21, 
applicable in step 1 of Sec.  385.22(b)(1)(i) is 12%. The minimum for 
use in step 1 of Sec.  385.22(b)(1)(ii) is the greater of--
    (i) The appropriate subminimum as described in paragraph (b) of 
this section for the accounting period, where the all-in percentage 
applicable to Sec.  385.23(b)(1) is 17.11%, and the sound recording-
only percentage applicable to Sec.  385.23(b)(2) is 20.65%; and
    (ii) The aggregate amount of 17 cents per subscriber per month.
    (5) Purchased content locker service. In the case of a purchased 
content locker service, the percentage of subpart C service revenue, as 
defined in Sec.  385.21, applicable in step 1 of Sec.  385.22(b)(1)(i) 
is 12%. For the avoidance of doubt, paragraph (1)(i) of the definition 
of ``Subpart C service revenue,'' as defined in Sec.  385.21, shall not 
apply. The minimum for use in step 1 in Sec.  385.22(b)(1)(ii) is the 
appropriate subminimum as described in paragraph (b) of this section 
for the accounting period, where the all-in percentage applicable to 
Sec.  385.23(b)(1) is 18%, and the sound recording-only percentage 
applicable to Sec.  385.23(b)(2) is 22%, except that for purposes of 
paragraph (b) of this section the applicable consideration expensed by 
the service for the relevant rights shall consist only of applicable 
consideration expensed by the service, if any, that is incremental to 
the applicable consideration expensed for the rights to make the 
relevant permanent digital downloads and ringtones.
    (b) Computation of subminima. For purposes of paragraph (a) of this 
section, the subminimum for an accounting period is the aggregate of 
the following with respect to all sound recordings of musical works 
used in the relevant subpart C offering, as defined in Sec.  385.21, of 
the service provider during the accounting period--
    (1) Except as provided in paragraph (b)(3) of this section, in 
cases in which the record company is the licensee under 17 U.S.C. 115 
and the record company has granted the rights to engage in licensed 
subpart C activity, as defined in Sec.  385.21, with respect to a sound 
recording through the third-party service together with the right to 
reproduce and distribute the musical work embodied therein, the 
appropriate all-in percentage from paragraph (a) of this section of the 
total amount expensed by the service provider or any of its affiliates 
in accordance with GAAP for such rights for the accounting period, 
which amount shall equal the applicable consideration for such rights 
at the time such applicable consideration is properly recognized as an 
expense under GAAP.
    (2) In cases in which the record company is not the licensee under 
17 U.S.C. 115 and the record company has granted the rights to engage 
in licensed subpart C activity, as defined in Sec.  385.21, with 
respect to a sound recording through the third-party service without 
the right to reproduce and distribute the musical work embodied 
therein, the appropriate sound recording-only percentage from paragraph 
(a) of this section of the total amount expensed by the service 
provider or any of its affiliates in accordance with GAAP for such 
rights for the accounting period, which amount shall equal the 
applicable consideration for such rights at the time such applicable 
consideration is properly recognized as an expense under GAAP.
    (3) In the case of a music bundle containing a physical 
phonorecord, where the music bundle is distributed by a record company 
for resale and the record company is the compulsory licensee, the 
appropriate all-in percentage from paragraph (a) of this section of the 
record company's total wholesale revenue from the music bundle in 
accordance with GAAP for the accounting period, which amount shall 
equal the applicable consideration for such music bundle at the time 
such applicable consideration is properly recognized as revenue under 
GAAP, subject to the provisions of Sec.  201.19 of

[[Page 67950]]

this title concerning the times at which distribution and revenue 
recognition are deemed to occur.
    (4) If a record company providing sound recording rights to the 
service provider for a licensed subpart C activity, as defined in Sec.  
385.21--
    (i) Recognizes revenue (in accordance with GAAP, and including for 
the avoidance of doubt all applicable consideration with respect to 
such rights for the accounting period, regardless of the form or timing 
of payment) from a person or entity other than the service provider 
providing the licensed subpart C activity, as defined in Sec.  385.21, 
and its affiliates, and
    (ii) Such revenue is received, in the context of the transactions 
involved, as applicable consideration for such rights,
    (iii) Then such revenue shall be added to the amounts expensed by 
the service provider solely for purposes of paragraph (b)(1) or (2) of 
this section, as applicable, if not already included in such expensed 
amounts. Where the service provider is the licensee, if the service 
provider provides the record company all information necessary for the 
record company to determine whether additional royalties are payable by 
the service provider hereunder as a result of revenue recognized from a 
person or entity other than the service provider as described in the 
immediately preceding sentence, then the record company shall provide 
such further information as necessary for the service provider to 
calculate the additional royalties and indemnify the service provider 
for such additional royalties. The sole obligation of the record 
company shall be to pay the licensee such additional royalties if 
actually payable as royalties hereunder; provided, however, that this 
shall not affect any otherwise existing right or remedy of the 
copyright owner nor diminish the licensee's obligations to the 
copyright owner.
    (c) Computation of subscriber-based royalty rates. For purposes of 
paragraphs (a)(3) and (4) of this section, to determine the subscriber-
based minimum applicable to any particular subpart C offering, as 
defined in Sec.  385.21, the total number of subscriber-months for the 
accounting period shall be calculated, taking into account all end 
users who were subscribers for complete calendar months, prorating in 
the case of end users who were subscribers for only part of a calendar 
month, and deducting on a prorated basis for end users covered by a 
free trial period subject to the free trial royalty rate as described 
in Sec.  385.24. The product of the total number of subscriber-months 
for the accounting period and the specified number of cents per 
subscriber shall be used as the subscriber-based component of the 
minimum for the accounting period.

Sec.  385.24  Free trial periods.

    (a) General provisions. This section establishes a royalty rate of 
zero in the case of certain free trial periods for mixed service 
bundles, paid locker services and limited offerings under a license 
pursuant to 17 U.S.C. 115. Subject to the requirements of 17 U.S.C. 115 
and the additional provisions of paragraphs (b) through (e) of this 
section, the free trial royalty rate shall apply to a musical work when 
a record company transmits or authorizes the transmission, as part of a 
mixed service bundle, paid locker service or limited offering, of a 
sound recording that embodies such musical work, only if--
    (1) The primary purpose of the record company in providing or 
authorizing the free trial period is to promote the applicable subpart 
C offering, as defined in Sec.  385.21;
    (2) No applicable consideration for making or authorizing the 
transmissions is received by the record company, or any other person or 
entity acting on behalf of or in lieu of the record company, except for 
in-kind promotional consideration used to promote the sale or paid use 
of sound recordings or audiovisual works embodying musical works or the 
paid use of music services through which sound recordings or 
audiovisual works embodying musical works are available;
    (3) The free trial period does not exceed 30 consecutive days per 
subscriber per two-year period;
    (4) In connection with authorizing the transmissions, the record 
company has obtained from the service provider it authorizes a written 
representation that--
    (i) The service provider agrees to maintain for a period of no less 
than 5 years from the end of each relevant accounting period complete 
and accurate records of the relevant authorization, and identifying 
each sound recording of a musical work made available through the free 
trial period, the licensed subpart C activity, as defined in Sec.  
385.21, involved, and the number of plays or downloads, as applicable, 
of such recording;
    (ii) The service is in all material respects operating with 
appropriate license authority with respect to the musical works it is 
using; and
    (iii) The representation is signed by a person authorized to make 
the representation on behalf of the service provider;
    (5) Upon receipt by the record company of written notice from the 
copyright owner of a musical work or agent of the copyright owner 
stating in good faith that a particular service is in a material manner 
operating without appropriate license authority from such copyright 
owner, the record company shall within 5 business days withdraw by 
written notice its authorization of such uses of such copyright owner's 
musical works under the free trial royalty rate by that service;
    (6) The free trial period is offered free of any charge to the end 
user; and
    (7) End users are periodically offered an opportunity to subscribe 
to the service during such free trial period.
    (b) Recordkeeping by record companies. To rely upon the free trial 
royalty rate for a free trial period, a record company making or 
authorizing the free trial period shall keep complete and accurate 
contemporaneous written records of the contractual terms that bear upon 
the free trial period; and further provided that, if the record company 
itself is conducting the free trial period, it shall also maintain any 
additional records described in paragraph (a)(4)(i) of this section. 
The records required by this paragraph (b) shall be maintained for no 
less time than the record company maintains records of usage of 
royalty-bearing uses involving the same type of licensed subpart C 
activity, as defined in Sec.  385.21, in the ordinary course of 
business, but in no event for less than 5 years from the conclusion of 
the licensed subpart C activity, as defined in Sec.  385.21, to which 
they pertain. If the copyright owner of a musical work or its agent 
requests a copy of the information to be maintained under this 
paragraph (b) with respect to a specific free trial period, the record 
company shall provide complete and accurate documentation within 10 
business days, except for any information required under paragraph 
(a)(4)(i) of this section, which shall be provided within 20 business 
days, and provided that if the copyright owner or agent requests 
information concerning a large volume of free trial periods or sound 
recordings, the record company shall have a reasonable time, in view of 
the amount of information requested, to respond to any request of such 
copyright owner or agent. If the record company does not provide 
required information within the required time, and upon receipt of 
written notice citing such failure does not provide such information 
within a further 10 business days, the uses will be considered not to 
be subject to the free trial royalty rate and the record company (but 
not any third-party

[[Page 67951]]

service it has authorized) shall be liable for any payment due for such 
uses; provided, however, that all rights and remedies of the copyright 
owner with respect to unauthorized uses shall be preserved.
    (c) Recordkeeping by services. If the copyright owner of a musical 
work or its agent requests a copy of the information to be maintained 
under paragraph (a)(4)(i) of this section by a service authorized by a 
record company with respect to a specific promotion, the service 
provider shall provide complete and accurate documentation within 20 
business days, provided that if the copyright owner or agent requests 
information concerning a large volume of free trial periods or sound 
recordings, the service provider shall have a reasonable time, in view 
of the amount of information requested, to respond to any request of 
such copyright owner or agent. If the service provider does not provide 
required information within the required time, and upon receipt of 
written notice citing such failure does not provide such information 
within a further 10 business days, the uses will be considered not to 
be subject to the free trial royalty rate and the service provider (but 
not the record company) will be liable for any payment due for such 
uses; provided, however, that all rights and remedies of the copyright 
owner with respect to unauthorized uses shall be preserved.
    (d) Interpretation. The free trial royalty rate is exclusively for 
audio-only licensed subpart C activity, as defined in Sec.  385.21, 
involving musical works subject to licensing under 17 U.S.C. 115. The 
free trial royalty rate does not apply to any other use under 17 U.S.C. 
115; nor does it apply to public performances, audiovisual works, 
lyrics or other uses outside the scope of 17 U.S.C. 115. Without 
limitation, uses subject to licensing under 17 U.S.C. 115 that do not 
qualify for the free trial royalty rate (including without limitation 
licensed subpart C activity, as defined in Sec.  385.21, beyond the 
time limitations applicable to the free trial royalty rate) require 
payment of applicable royalties. This section is based on an 
understanding of industry practices and market conditions at the time 
of its development, among other things. The terms of this section shall 
be subject to de novo review and consideration (or elimination 
altogether) in future proceedings before the Copyright Royalty Judges. 
Nothing in this section shall be interpreted or construed in such a 
manner as to nullify or diminish any limitation, requirement or 
obligation of 17 U.S.C. 115 or other protection for musical works 
afforded by the Copyright Act, 17 U.S.C. 101, et seq.

Sec.  385.25  Reproduction and distribution rights covered.

    A compulsory license under 17 U.S.C. 115 extends to all 
reproduction and distribution rights that may be necessary for the 
provision of the licensed subpart C activity, as defined in Sec.  
385.21, solely for the purpose of providing such licensed subpart C 
activity, as defined in Sec.  385.21 (and no other purpose).

Sec.  385.26  Effect of rates.

    In any future proceedings under 17 U.S.C. 115(c)(3)(C) and (D), the 
royalty rates payable for a compulsory license shall be established de 
novo.

    Dated: August 21, 2013.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.
    Approved by:
James H. Billington,
Librarian of Congress.
[FR Doc. 2013-25454 Filed 11-12-13; 8:45 am]
BILLING CODE 1410-72-P
```